It is important to observe the correct formalities when dealing with insolvent or bankrupt parties, or companies in administration. A failure to follow the correct procedure can lead to a defect in title that will allow a seller to rescind (and not complete).

This is well illustrated by a recent case involving an informal surrender by a T against whom a bankruptcy petition had been presented. The point, of course, is that a surrender of the lease will be regarded as a ‘disposal’ of property, and therefore it must be approved by the trustee or by the court. If that insolvency law procedure is not followed, and consent is not obtained, then the purported surrender or assignment will be invalid. Thus, if L subsequently tries to sell the property with vacant possession, then a buyer can rescind on the basis that there is still a lease in existence (even if T has vacated).

The real point to appreciate is that informal surrenders can carry risks and may affect a subsequent sale if the legal title remains alive. An informal surrender will be ineffective if it is contrary to insolvency law procedures. Thus, if offered an informal surrender, a cautious L may prefer to deal with this by way of formal deed, and ensure that the title is investigated properly (with searches being made against the surrendering T) and the LR title being properly updated.

The scenario set out above is exactly what happened in a recent case. The seller argued that the existence of the lease on the title was simply a technical conveyancing defect (given that T was not in occupation, and given the trustee in bankruptcy was willing to confirm that the title was clear). The real problem for the seller in that case was that there was a special condition saying that it was with ‘vacant possession’ and that the lease noted on the title had been determined by operation of law. What the seller should have done to deal with such a defect was to have made the sale subject to the leasehold interest, and then made all material facts known to the buyer (so the buyer could then come to a view on the situation). See commentary on Weir v Area Estates Ltd [2009] All ER (D) 189 in [2010] 249 PLJ 5.